Media Room

dedicated, diverse counsel helping you reach your goals

 

FirstEnergy Solutions v. Flerick: Solicitation of Former Clients Results in Enforcement of Non-Compete in Six States

 
by John Marsh 17. April 2013 23:55

A salesman's solicitation of his former clients, coupled with his previous access to trade secrets, has led to enforcement of a non-compete spanning six states.  In FirstEnergy Solutions v. Flerick, the U.S. Court of Appeals for the Sixth Circuit applied a deferential review of the Ohio district court's opinion enforcing that one-year non-compete.  A PDF copy of the opinion can be found below.
 
Background:  Paul Flerick was a salesman for FirstEnergy.  While negotiating the terms of his employment with FirstEnergy, Flerick expressed concerns about the proposed noncompete and attempted to negotiate a revision that would allow him to work for a competitor after leaving FirstEnergy as long as he did not directly contact FirstEnergy’s customers. FirstEnergy refused, telling him that it was a “[c]ondition of hire.”  Flerick eventually capitulated and signed the agreement.

After receiving a negative review and reassignment, Flerick joined Reliant Energy, a competitor of FirstEnergy.  After his resignation, FirstEnergy reminded him about his noncompete clause, and Flerick said that it would not be an issue.  When asked about his plans, he declined to provide any information. Flerick was required to and did return all company-issued electronic devices and all company documents. 

When FirstEnergy learned that Flerick was working for Reliant, it sent Flerick a cease-and-desist letter.  Reliant’s counsel replied and indicated that Flerick did not possess any confidential information, had not solicited any customers to whom he sold electricity in the year before he left FirstEnergy, and that the provision prohibiting Flerick from working for a competitor was overly broad and unenforceable.
 
After suing Flerick, FirstEnergy learned (and the District Court found) that Flerick had improperly solicited his largest customer from First Energy (Duke Realty) and that he also improperly contacted other FirstEnergy customers in Pennsylvania, New Jersey, Ohio and Maryland through intermediaries.
 
The U.S. District Court for the Northern District of Ohio enforced the non-compete reasoning that Flerick had breached it by soliciting his former customers and because he still possessed confidential information that he had obtained while employed by First Energy.  The court enforced the non-compete for the full year and in the six states in which First Energy did business.
 
Last week, the Sixth Circuit affirmed that injunction, ruling that under Ohio state law, violation of the non-compete when coupled with the possession of confidential information was enough to warrant enforcement of that non-compete clause, even one over six states.  Applying a very deferential review, the Sixth Circuit emphasized repeatedly the improper solicitations of former clients by Flerick as well as the fact that Flerick understood that the non-compete was a condition of employment.  The Sixth Circuit reasoned that Flerick was free to operate in five other states in which FirstEnergy did not do business and was not unduly harmed by the injunction.

The Takeaway:  First, it appears that Flerick's counsel tried the IBM v. Visentin defense -- i.e., arguing that efforts to safeguard the legitimate protectible interests of FirstEnergy would obviate the need for a non-compete.  However, that effort was doomed by subsequent disclosure that Flerick had improperly solicited FirstEnergy's clients.

Second, this opinion demonstrates the deferential review accorded a trial court in injunctive relief proceedings and the importance of prevailing at the trial court level.  The trial court was clearly unhappy about Flerick's solicitation of his former customers and enforcement of a non-compete throughout six states seems severe.  However, the Sixth Circuit refused to disturb the injunction.

Finally, I have to confess I was disappointed with the Sixth Circuit's further justification for the non-compete because of Flerick's exposure to trade secrets of First Energy.  Extended to its logical conclusion, any non-compete would be fully enforceable on this basis because most employees are inevitably exposed to confidential information of their former employer.  Had the Sixth Circuit simply left the need to protect customer relationships as the basis for the non-compete, it would have been more than enough since it was Flerick's improper pursuit of those customers that drove the injunction.

FirstEnergy v. Flerick.pdf (133.92 kb)

 

Thursday Wrap-Up (August 9, 2012): Noteworthy Trade Secrets, Non-Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 9. August 2012 10:30

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well one or two that I missed from the previous week:

Noteworthy Trade Secret and Non-Compete Articles, Cases and Posts:

  • A San Jose jury has awarded $112 million to networking equipment supplier Brocade Communications Systems Inc., finding that A10 Networks Inc. stole its trade secrets and infringed its intellectual property to start a competing business with ex-Brocade workers, reports Law360. Brocade's press release also indicated that Brocade had asserted claims for patent and copyright infringement that covered all of A10’s AX Series load balancing server products.
  • In a high profile healthcare dispute, Renown Heath has reached an agreement with the Federal Trade Commission and the Nevada Attorney General's office over its non-competes with 10 staff cardiologists it formerly employed in Nevada. Renown had cornered about 97% of the cardiology market and its acquisition of previously independent cardiology groups was perceived as likely to result in price increases to health plans and individuals paying for cardiology services in the area. The settlements will allow those cardiologists to join competing practices without penalty.
  • Many settlement agreements and consent decrees have non-disparagement provisions, but are those provisions enforceable? According to Berman Fink Van Horns' Georgia Non-Compete and Trade Secret News Blog, they may not. In Sesolinc Group, Inc. v. Metal-con Inc., 2012 WL 2119768 (S.D. Ga. June 11, 2012), a Georgia federal court declined to approve a consent decree presented by the parties because it might entangle the court in First Amendment issues such as potentially enforcing an order forbidding constitutionally-protected commercial speech. 
  • What are holdover clauses and are they enforceable? Kenneth Vanko answers both questions in his recent post on the South Carolina Supreme Court's decision in Milliken & Co. v. Morin upholding the enforceability of these provisions, which are designed to protect the ownership and assignability of inventions created with an employer's confidential information after an employee's departure.
  • Another court has signalled that circumstantial evidence of misappropriation is insufficient to overcome an employee's denials, advises Epstein Becker's Trade Secrets & Noncompete Blog.  In a Georgia appellate decision, Contract Furniture Refinishing & Maintenance Corp. of Georgia d/b/a The Refinishing Touch v. Remanufacturing & Design Group, the court ruled that while the plaintiff TRT produced strong circumstantial evidence that the defendant Deutsch may have misappropriated or disclosed its trade secrets, the “evidence is also consistent with the direct evidence that Deutsch did not in fact do so. The circumstantial evidence therefore has no probative value, and TRT cannot demonstrate a genuine issue of fact with regard to its misappropriation of trade secrets claim.”
  • Indiana businesses better have reasonable time, subject matter and geographic limitations in their confidentiality agreements or they may not be enforceable, warns Seyfarth Shaw's Trading Secrets Blog
  • If you have clients in the financial and investment communities, you should read "For some firms, brokerage-hiring protocol no longer holds value" by Dan Jamieson for Investment News.
  • Interested in the "State of Texas Non-Competes"? Consult Rob Radcliffe's Smooth Transitions Blog, where he has posted an article he recently wrote on the matter (the news is good for employers).
  • E. Patrick Ellisen and Daniel T. McCloskey have advice for "Protecting Confidential Information and IP Amid Employee Mobility" in an article for Corporate Counsel.
  • At long last, something upon which members of Congress can agree. Last week, the U.S. House of Representatives voted to approve H.R. 6029, the Foreign and Economic Espionage Penalty Enhancement Act of 2012, which increases the penalties under the Economic Espionage Act from the statutory maximum for economic espionage and the theft of trade secrets for the benefit of a foreign entity to 20 years from 15, raises the fine that can be imposed to a maximum of $5 million from $500,000, and adds criminal penalties for passing trade secret information that would benefit a foreign government.  A companion bill, S. 678, with similar language is under review by the Senate.

Computer Fraud and Abuse Act Posts:

  • Foley & Lardner's Privacy & Security Source Blog is not happy about the recent decisions in Nosal and WEC Carolina in its post "De-CFAA-nating Federal Law: Recent Appeals Courts Decisions Weaken Statutory Protections Against Unauthorized Use of Electronic Data." For the views of other trade secrets blogs on the WEC Carolina decision, see Seyfarth Shaw's post, Fisher & Phillips' post, Epstein Becker's post and Littler's post (my take can be found here). 
  • A California federal court has allowed a CFAA claim arising out of the violation of a computer use policy to go forward because the policy limited the access of the former employee, reports Eric Goldman in his Technology & Marketing Law Blog. In Weingand v. Harland Financial Solutions, C 11 3109 EMC (N.D. Cal.; June 19, 2012), the Northern District found that the reasoning in U.S. v. Nosal did not apply because the policy in question prohibited the access at issue.

 
Cybersecurity Posts and Articles:

  • For those interested in finding out what sank the Cybersecurity Act of 2012, there are plenty of opinions from which to choose. Steptoe & Johnson's Cyberblog and Peter S. Vogel share their thoughts. Shockingly, The New York Times blames the Republicans while The Wall Street Journal blames the Democrats. And, as always, Catherine Dunn of Corporate Counsel has a fine piece entitled, "A Long, Hot Summer for Corporate Cybersecurity."
  • "Protect your IP: hashing your passwords" counsels Scott Flaherty of Briggs and Morgan. 
  • "'Spearphishing' Fraud Hooks More Victims: How cybercriminals disguise themselves as your bank, your boss, or even the IRS" advises Jen Weiczner of SmartMoney.

News You Can Use:

  • And The New York Times Bits Blog provides some advice on "What You Can Do to Better Protect Your Apple Account."
 

Acordia of Ohio v. Fishel: In Highly Unusual Move, Ohio Supreme Court Grants Request for Reconsideration of Decision Denying Enforcement of Non-Compete in Merger Context

 
by John Marsh 25. July 2012 21:45

The Acordia of Ohio v. Fishel case has taken an unexpected turn, as the Ohio Supreme Court has granted a request for reconsideration of its May 24, 2012 decision in which it refused to enforce a non-compete in the context of a corporate merger or reorganization because of the perceived shortcomings in the language of the non-competes before it. Former Appellate Judge Marianna Brown Bettman has a very thorough and excellent post of this highly unusual decision in her Legally Speaking Ohio Blog, which closely monitors proceedings before the Ohio Supreme Court.
 
For those not familiar with the decision, the Acordia case involved an effort by a company to enforce a non-compete against several former employees who had signed covenants not to compete with a corporate predecessor. However, the non-competes in question did not specifically include language or provisions making clear that assignees or corporate affiliates were covered by the non-compete. The trial court, the First Appellate District (the court of appeals for Hamilton County, which includes Cincinnati) and ultimately the Ohio Supreme Court, all applied the specific language of the non-compete and found the failure to include language that applied the non-compete to assignees, successors or affiliates doomed its enforcement. Acordia had relied on an Ohio statute that provided that by operation of law all assets of the merged company transfer to the acquiring or new company. 

The decision has apparently caused great consternation in the business community. Judge Bettman notes that Acordia had "heavy fire-power" in support of its request for reconsideration, as the Ohio Chamber of Commerce and a number of other businesses filed for reconsideration as amici in support of Acordia. She quotes the following language: The heart of this case is a simple question: when a lawyer drafts a competition agreement for a corporate client, does the lawyer need to include “successors and assigns” language or not… [S]ince this Court issued its decision in this case, the Internet has been filled with advice and reminders to lawyers to include such language when drafting all their employment agreements and other corporate contracts.” 

According to Judge Bettman, these business amici emphasized that this is not a mere matter of contract law but, rather that, under the Ohio constitution, it is the General Assembly, not the Supreme Court, that has the power to establish and modify state law and the General Assembly has made it clear that such language is not necessary when a corporation goes through a statutory merger.

The vote to reconsider was 6 to 1, which is intriguing because Acordia was a 4 to 3 decision. It will be interesting to see if any of the justices who voted with the majority are seriously considering changing their vote. Frankly, I am genuinely surprised by this development and I now believe that the Supreme Court may reverse itself and apply the majority rule permitting the transfer of non-competes after a merger or reorganization. I will keep you posted on any further rulings and developments in this important case.

 

Friday Wrap-Up (July 13, 2012): Noteworthy Trade Secrets, Covenant Not to Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 13. July 2012 15:30

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week:
 
Noteworthy Trade Secret and Non-Compete Posts and Cases:
  • A Washington federal judge issued a writ of garnishment on behalf of DuPont last week against Kolon Industries Inc., ordering an associated company to become a garnishee following DuPont's $920 million trade secret verdict against Kolon last fall, Law360 is reporting. A PDF copy of the order can be found below. The parties are waiting on a ruling on DuPont's motion for permanent injunction from U.S. District Court Judge Robert Payne back in Richmond Virginia. For more on the DuPont v. Kolon case, see my previous posts here and here. 
  • An Illinois court has recently found that breach of an agreement must be material to void a non-compete reports Epstein Becker's Trade Secrets and Noncompete Blog.  The case, InsureOne Indep. Insur. Agency v. Hallberg, involved the enforcement of a non-compete that accompanied a sale of a business.  For what it is worth, in my experience, courts tend to be less forgiving of a breach by an employer in non-competes involving an employee.
  • Michigan is the latest state to consider scaling back its enforcement of non-competes. Senate Bill 786, which was introduced in late 2011, would require Michigan employer to advise a potential employee of the requirement to sign a non-compete agreement as a condition of employment. This requirement is gaining traction nationally, as New Hampshire recently adopted a similar statute imposing a similar requirement upon its employers, which becomes effective tomorrow. 
  • What are the risks and benefits of suing the company that hires a former employee with a non-compete? The Delaware Non-Compete Blog has a practical post outlining the practical considerations every company should weigh before joining a competitor in a dispute over a covenant not to compete. 
  • For those interested in working through the legal thicket of garden leave provisions -- i.e., provisions that pay an employee for a post-employment waiting period so that he/she does not compete -- check out the Burr & Forman Non-Compete and Trade Secrets Blog's recent post, which provides a good summary of the caselaw construing these provisions.

Computer Fraud and Abuse Act Cases and Posts:

  • The Solicitor General has been granted a 30 day extension so he can continue to evaluate whether he wants to appeal from the Ninth Circuit's en banc decision in U.S. v. Nosal, reports Seyfarth Shaw's Trading Secrets Blog.  That decision narrowly applied the CFAA, finding that a violation of a computer use policy was insufficient to trigger that statute.  For more detail, see my earlier post.
  • A New York state court has recently decided to follow Nosal's holding in a short decision dismissing a CFAA claim, reports Foley & Hoag's Massachusetts Non-Compete Blog. The opinion MSCI Inc. v. Jacob, 2012 N.Y. Slip. Op. 05107 (N.Y. App. Div., 1st Dep't June 26, 2012), provides little detail but signals the growing divide over the scope of the CFAA. 
  • Littler's Unfair Competition & Trade Secrets Counsel Blog has a post about another recent CFAA decision, Del Vecchio v. Amazon, where the plaintiff's CFAA claim was dismissed because it failed to provide specific facts showing the actual value of the trade secrets at issue or the actual profits lost as a result of the theft.

Cybersecurity Posts and Articles: 

  • The big news this week was the breach of 400,000 Yahoo accounts but The New York Times is reporting that the breach extends beyond Yahoo to Gmail, Hotmail, and AOL Users. 
  • "Cybercriminals Sniff Out Vulnerable Firms" advises The Wall Street Journal
  • Forbes' Andy Greenberg details the plan on "How To Hijack 'Every iPhone In The World.'"
News You Can Use: 
  • Can this relationship be saved? "He Texts, She Tweets—Are They E-Compatible? Setting Digital Ground Rules to Become E-Compatible With Family and Friends" writes Elizabeth Bernstein in The Wall Street Journal.

 Dupont v Kolon - Writ of Garnishment.pdf (86.82 kb)

 

Thursday Wrap-Up (June 28, 2012): Noteworthy Trade Secrets, Non-Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 28. June 2012 10:45

Here are the noteworthy posts, articles and cases of the past week:

Trade Secret and Non-Compete Cases and Posts:

  • U.S. District Court Judge Gary Keess issued his opinion explaining his reasons for denying CBS' Motion for TRO to prevent the premiere of ABC's Glass House reality show.  A copy of the Opinion can be found in the PDF below. As expected, Judge Keess expressed "serious doubts" about whether CBS had any trade secrets, let alone whether ABC had misappropriated them. He dismantled CBS' claims that its Big Brother "House Guest" manual qualified as a trade secret (labelling it "generic") and found that the "filming, editing and production techniques" were commonplace in the industry. Judge Keess also rejected any claim of irreparable injury, reasoning any harm was readily compensable by a damages award.  For more on this case, see my earlier posts here and here.
  • MGA's insurers have sued for their share of the $137 million in lawyers' fees and costs award in the epic MGA v. Mattel "Bratz" case according to Alison Frankel's On The Case Blog. National Union Fire Insurance Company of Pittsburgh and Crum & Forster Specialty Insurance Company have filed a declaratory action for those fees and MGA is expected to oppose the complaint as premature.
  • The "inevitable disclosure doctrine" appears to be on life support in Massachusetts, according to recent posts in Kenneth Vanko's Legal Developments in Non-Competition Agreements Blog and Seyfarth Shaw's Trading Secrets Blog. Both posts describe the U.S. District Court of Massachusetts' ruling in U.S. Elec. Svcs., Inc. v. Schmidt, 2012 U.S. Dist. LEXIS 84272 (D. Mass. June 19, 2012), that the doctrine cannot be applied in the absence of a non-compete, at least under Massachusetts law. 
  • For those practicing before the International Trade Commission, the ITC 337 Blog has a comprehensive summary of the latest trade secret cases filed before the ITC. 
  • In a post entitled "Can I Protect My Trade Secrets Via Social Media Policy," James Douglass provides a nice recap of the recent National Labor Relations Board's opinion on social media and how to draft enforceable social media policies to protect your trade secrets in Fisher & Philips' Trade Secrets and Noncompete Blog
  • "You Want to Enforce a Non-Compete? Bad Facts, Sir, Give Me Some Bad Facts!"  advises the Mass Law Blog. Well stated, Mass Law Blog, well stated.
  • "Employers beware: Revisions of non-compete agreements are becoming essential" writes Richard Glovsky for Inside Counsel. Richard's article details the challenges of enforcing non-competes against employees who are promoted, reassigned or take on additional responsibilities. 
  • How will the America Invents Act's "prior user rights" impact the bio and pharma industries? The Patent Docs Blog has a post that concisely summarizes the debate at the recent BIO International conference (the post concludes that the impact may be minimal). 
  • Are you representing both the employee accused of stealing trade secrets and his/her new employer? Then you should read "Three Pitfalls of Joint Representation in Non-Compete Cases" by W. Mark Bennet for Strasburger's NonCompete Blog

 
Cybersecurity: 

  • "Lawyers Get Vigilant on Cybersecurity" reports The Wall Street Journal. For more on this issue, please see my February post detailing increasing cyberattacks directed at lawyers. 
  • The latest headache in BYOD? "Who Owns the Email?" asks Gardere's Peter Vogel in his Internet, Information Technology and e-Discovery Blog
  • Monica Bay details "The Fast Rise of the 'Bring Your Own Device' Buzzword" in Corporate Counsel
  • For an interesting take on the ongoing debate over the pending cybersecurity legislation, check out Forbes writer Ken Silverstein's "Cyber Security Debate Pits Corporate Interests Against National Security."
  • Looking for "An App that Encrypts, Shreds, Hashes and Salts"?  Check out this post on The New York Times Bits Blog.

News You Can Use: 

  • The Time Management Ninja has "10 Apps to Make Your iPad More Productive."
  • In "Stunning Progress in Technology: The Death of Unskilled Labor," Forbes' Aaron Franks details the changes in tech manufacturing that may mean these jobs are never coming back.

CBS v ABC Order 06 21 12.pdf (63.65 kb)

 

Thursday Wrap-Up (June 21, 2012): Noteworthy Trade Secrets, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 21. June 2012 10:45

Here are the noteworthy posts, articles and cases of the past week:

Trade Secret and Non-Compete Cases and Posts:

  • Capital One has squeezed $20 million from former executives John Kanas and John Bohlsen on the eve of a jury trial that might have prevented their new employer's expansion into New York, reports Reuters' Alison Frankel in her On The Case Blog. As readers of this blog may recall, I posted Kenneth Vanko's fine report on this case when U.S. District Court Judge Liam O'Grady of the Eastern District of Virginia enforced the former executives' non-competes after taking into account their sophistication and commercial expertise. The two men had signed an agreement that awarded restricted stock deals worth $24 million for Kanas and $18 million for Bohlsen in exchange for the non-compete clauses.
  • Alliant has scored a big victory in its ongoing dispute with Aon over allegations that former Aon employees had improperly poached clients. In June 2011, Alliant and former Aon employees Peter Arkley, Ken Caldwell and Michael Parizino sued to challenge the enforceability of the non-competes the men signed while at Aon.  Last Wednesday, Judge Dale Fischer of the U.S. District Court for the Central District of California struck down the non-compete provisions in Aon's employment agreements. 
  • Don't identify your general counsel (GC) as a witness in a trade secret case cautions Womble Carlyle's Trade Secrets Blog in a recent post. After an unsuccessful injunction against its competitor Logoplaste, the plaintiff Portola was ordered to produce its GC's damaging emails because he was listed as a witness.  The emails revealed he had urged Portola to sue just to hurt Logoplaste’s business interests and had hired Logoplaste’s regular counsel in an unrelated matter to create a conflict. Finally, although Portola claimed that its confidential documents were used to lure an employee away, the emails showed the very opposite -- that the GC  knew the employee approached Logoplaste first. As a result, the court ordered Portola to pay all of Logoplaste’s attorneys’ fees for the three years of litigation.
  • In another post about a trade secret case gone wrong, Foley & Hoag's Massachusetts Non-Compete Law Blog reports that the counterclaim arising from the unsuccessful case brought by Brocade Communications against its former employee, David Cheung, has been dismissed. The court dismissed the counterclaim because the only evidence in support of the claim arose from settlement discussions and was therefore inadmissible. Law 360 has since reported that the parties have agreed to dismiss their respective claims against one another.
  • In an article entitled "Arbitrators Slam SunTrust's Legal Tactics In Non-Solicitation Case Against Former Employee," Forbes' Bill Singer writes about a recent FINRA arbitration decision scaling back a covenant because of the "hardball" tactics of SunTrust's counsel. According to Bill, the panel was unhappy with the fact that SunTrust secured an ex parte TRO despite knowing the former employee had an attorney who had requested notice of any legal proceeding.
  • Burr & Forman's Non-Compete and Trade Secrets Blog has a good post about the benefits of a seldom-used provision called a "Full Time and Attention" provision. This provision requires that an employee dedicate his or her full efforts to her job up until departure. As many employees may use the bulk of their final weeks planning and readying to leave, this provision could provide another arrow for the employer to have in its quill for a breach of contract claim in a potential lawsuit.
  • Good news for employees in New Hampshire, reports Seyfarth Shaw's Trading Secrets Blog. Beginning July 14, 2012, employers in New Hampshire will have to disclose that they will require a non-compete or anti-piracy agreement as a condition of employment prior to making offers of new employment and to existing employees with an offer of change in job classification.

Computer Fraud & Abuse Act Cases and Posts: 

  • Covington's Inside Privacy Blog details the recent dismissal of CFAA and trespass claims against Amazon. In Del Vecchio v. Amazon, a district court in Washington dismissed the claims that Amazon “exploit[ed]” browser controls in Internet Explorer by publishing a “gibberish” P3P compact policy and using Flash cookies for tracking. The court found, among other things, that the plaintiff failed to meet the requisite $5,000 showing for damages.

Cybersecurity Posts and Articles: 

  • In an article entitled "The promises and perils of the cloud" for Inside Counsel, James Kunick explains things in-house counsel should consider before making the big move to cloud computing.
  • "Negotiate a Source Code Audit to Resolve Software Theft Disputes" advises Daniel T. McClosky for Corporate Counsel.
  • "BYOD wave sparks big security concerns" warns Barb Darrow for Gigaom
  • "Insider threat: The game has changed" writes Bill Anderson for SC Magazine.

News You Can Use: 

  • David Donoghue's Chicago IP Litigation Blog's recent post, "Rocky Mountain IP Institute: Judge Kozinski’s Advocacy Lessons for IP Lawyers," is a good, quick reminder for all of us.
  • "Reading This Might Just Preserve Your Identity and Reputation" advises Baker & Hostetler's Data Privacy Monitor Blog.
 

Thursday Wrap-Up (May 31, 2012): Noteworthy Trade Secret, Non-Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 31. May 2012 10:30

Here are the noteworthy posts, articles and cases of the past week:

Trade Secret and Non-Compete Cases and Posts:

  • Google did not steal search engine trade secrets from a sales pitch over coffee, a California appellate court has ruled. Eric Goldman's Technology & Marketing Blog has a fine summary of the case, Booloon, Inc. v. Google, Inc. Eric notes that the absence of a non-disclosure agreement, conclusory descriptions of the trade secrets at issue, and the plaintiff's inability to refute Google's evidence that it did not misappropriate the alleged trade secrets doomed what appears to have been a pretty weak trade secret case. Eric's takeaway? Make sure that ground rules are established in even the most informal settings to minimize any future dispute (and don't forget that NDA).
  • The wrestling may be fake but the trade secrets are for real. Total Nonstop Action Wrestling (TNA) has filed a lawsuit in Nashville against World Wrestling Entertainment (WWE) and former TNA and WWE employee Brian Wittenstein for, among other things, violations of the Tennessee Uniform Trade Secrets Act and breach of fuduciary duties owed by Wittenstein to TNA. TNA claims that Wittenstein, who worked for TNA for three years and handled third-party booking for TNA talent to work independent shows before he left for WWE, provided WWE with inside information about those TNA contracts.
  • "IBM’s Siri ban underscores important business concern over trade secrets" writes Evan Brown in his Internet Cases Blog. IBM's policy grows out of its concern that Apple may store and use sensitive IBM data. According to Evan, Apple’s data usage policy that governs how it treats Siri inquiries says that Apple can use the information it collects to, among other things, improve the service. 
  • Eaton Corporation has fired two in-house lawyers involved in a botched Mississippi trade-secrets case that was dismissed last year amid allegations that Eaton and its counsel had improperly attempted to influence the previous judge. The Cleveland Plain Dealer says that the two lawyers, Vic Leo, vice president and chief litigation counsel, and Sharon O'Flaherty, litigation counsel, were recently required to file affidavits explaining why certain emails were not produced earlier in the case. In a related post, Law360 is reporting that Mississippi prosecutors are dropping criminal charges against the former Eaton engineers at the center of this dispute.
  • "Espionage on Campus: It's Not All Keggers Parties -- Spies May Be Watching!" warns Vanson Soo of the Asia Sentinel.  Vanson notes an unclassified FBI report, “Higher Education and National Security: The Targeting of Sensitive, Proprietary, and Classified Information on Campuses of Higher Education” recently warned American administrators that foreign intelligence services use universities for their intelligence and operational needs because the open environment of US colleges is “an ideal place to find recruits, propose and nurture ideas, learn, and even steal research data, or place trainees.”
  • For those in Ohio, there is plenty of commentary this week about the Ohio Supreme Court's decision in Acordia of Ohio v. Fishel barring the transfer of a non-compete after a merger if the agreement fails to provide for assignment to successors or the new company (I wrote about this case last week). Former Appellate Judge Marianna Brown Bettman, who has followed the case closely, has a thorough post in her Legally Speaking Ohio Blog. For the take of other lawyers on this important case, see Jon Hyman's Ohio Employer's Law Blog post, Kenneth Vanko's post, and Epstein Becker's post.
  • For those in Florida, Burr & Forman's Non-Compete & Trade Secrets Blog has a post about a recent decision rejecting a company's trade secrets claim against a former employee.  According to the post, in Duchame v. Tissuenet Distribution, Florida's Fifth Circuit Court of Appeals upheld the dismissal of the claims due to the absence of a non-compete agreement and because the chemicals used for the allegedly stolen process were well known within the industry.
  • The think-tank CREATe has issued a white paper entitled "Trade Secret Theft: Managing the Growing Threat in Supply Chains" to assist multi-national corporations in better protecting their trade secrets overseas. CREATe was formed last fall by former Microsoft Deputy General Counsel Pamela Passman to, among other things, protect IP rights and drive responsible business practices in global supply chains and business networks.

Computer Fraud and Abuse Act Posts:

  • Seyfarth Shaw's Trading Secrets Blog has a post about a recent Computer Fraud and Abuse Act (CFAA) case from the U.S. District Court for the Eastern District of Michigan narrowly applying the statute. In Ajuba International , LLC v. Saharia, the court elected to follow the approach recently applied by the Ninth Circuit in U.S. v. Nosal and found that the former employee had authorized access to the information at issue by virtue of his employment.

Cybersecurity Articles and Posts:

  • "IBM stung by BYOD pitfalls" writes Barb Darrow of gigaom
  • "BYOD savings may be lost by security and admin costs" warns Rainer Enders for SC Magazine. Rainer cites a recent study as having found companies adopting BYOD spend 33% more than companies adopting a company-owned policy. 
  • Naked Security asks "How long would it take to crack your password?"
  • The New York Times provides some help on how to "Build Up Your Phone’s Defenses Against Hackers."

News You Can Use:

  • "Malicious E-Mail Attachment on Olympics Making Rounds on the Internet" advises The New York Times Bits Blog.
 

Acordia of Ohio v. Fishel: Ohio Supreme Court Finds Non-Compete Does Not Survive Merger If It Lacks "Successor or Assigns" Language

 
by John Marsh 25. May 2012 01:30

Earlier this week, I reported that the Ohio Supreme Court was still considering the Acordia of Ohio v. Fishel case, a dispute that pits the language of a covenant not to compete against an Ohio statute whose purpose is to facilitate the transfer of assets in a merger. 

Yesterday, the Ohio Supreme Court issued its ruling in a 4-3 decision holding that the language of a covenant not to compete controls and will not be extended to the new company after a merger if the covenant's language fails to specifically assign its rights to the new company. (A PDF copy of the slip opinion can be found below).

I wrote about the Acordia case last fall. Four employees challenged their non-competes, arguing that after a series of mergers, their non-competes were no longer enforceable. They argued that the literal language of their covenants was confined to the previous employer and did not extend to future companies or use language extending the covenant to the company's "successors and assigns." When the employees left several years later, they argued that their non-competes had begun to run at the time of the merger and were now expired. The trial court and the Court of Appeals for the First District agreed.

The Majority Opinion: The Majority's analysis was simple:  apply the contract as written. Since the covenant did not include assignees nor provide for the assignment to a successor, the relationship terminated when the employer ceased to exist as a result of the merger, and the non-compete began to run (although technically there was no longer any employer to benefit from the non-compete). Thus, under its terms, the covenant had expired before the employees left to join a new employer

The majority was not troubled that it was treating the non-compete any differently than any other asset. Since the previous employer had elected to limit the benefit of the contract to that company alone, the new company got the same bargain that the asset (the non-compete) provided -- namely, a non-compete confined to the previous company.

The Dissent:  The Dissent, however, believed that the Ohio statute governing mergers, Ohio R.C. 1701.82 and 1705.39, should have controlled. Those statutes, by their operation, vested all the assets and obligations of a constituent entity in the surviving entity without reversion or impairment. The Dissent reasoned that a covenant not to compete should be treated like any other asset and should inure to the benefit of the new company.
 
The Takeaway?  Ohio employers and companies better check their non-competes. If their agreements do not broadly define the "Company" to include successors and assigns or do not include a provision permitting the assignment of the covenant, they will be deemed to begin running in the event of a merger, acquisition or reorganization and perhaps expire before an employee joins a competitor.

Further Thoughts (May 26, 2012): One point that needs to be made, after further reflection, is that, under the logic of the Acordia decision, any kind of corporate reorganization could result in the loss of the benefit of the covenant not compete, non-solicitation agreement or non-disclosure agreement. In other words, if a business decides to change from an "S" corporation to a limited liability corporation and its agreements fail to include "successor or assign" language or fail to include a provision permitting an assignment, the time periods of those agreements would begin to run at the time of the reorganization.

2012-ohio-2297.pdf (66.95 kb)

 

Recent Legal Developments in Ohio Non-Compete and Trade Secret Law

 
by John Marsh 21. May 2012 11:00

Having just given a presentation on current developments in Ohio Covenant Not to Compete law, it made some sense to write a post summarizing a number of the more recent noteworthy trade secrets and covenant not to compete decisions here in the Buckeye State over the past few months.

Two Big Decisions Due from the Ohio Supreme Court:

The Ohio Supreme Court has two important cases in which decisions are expected soon. Both address issues that are hot topics right now in the trade secret and covenant not to compete community.

The first opinion should be issued in the American Chemical Ass'n v. Leadscope, Inc. case, which addresses whether the plaintiff ACS's unsuccessful trade secrets case against its former employees and their fledgling company should give rise to a claim for malicious litigation. As two high profile cases have been brought recently against law firms and former employers for allegedly bringing trade secret actions in bad faith, this may prove to be a bellwether opinion. The ACS case also provides a lesson in the dangers of potentially overreaching in a weak trade secrets case, as well as the power of the "David v. Goliath" theme for juries.

As you might expect, the facts are fairly involved but essentially, ACS brought a claim against its former employees and their company, Leadscope, for allegedly stealing technology from ACS. In conjunction with the litigation, ACS also made it known that the technology was in dispute and made statements to others that Leadscope had improperly taken it from ACS, which substantially impacted Leadscope's ability to get financing and run its business. 

At trial, the jury awarded over $26.5 million in compensatory and punitive damages to the defendants for their counterclaims of unfair competition (which was premised on a theory that the underlying litigation was malicious and in bad faith), intentional interference, and defamation; the judgment has swelled to $40 million with interest and attorneys fees. The individual defendants and Leadscope argued that ACS had commenced the litigation as part of a larger plan to disrupt, if not destroy, their new business. 

The Supreme Court is most likely grappling with the issue of whether unfair competition may include a theory of malicious litigation, a contention that has troubled the State of Ohio enough that the Ohio Attorney General's Office filed an amicus brief and appeared and argued in support of ACS's position. Oral argument took place in September, so a decision should be forthcoming soon. For a good summary of the oral argument and some handicapping of how some of the Justices might rule, please see former Appellate Judge Marianna Bettman's Legally Speaking blog post on this decision.
 
The other case, Acordia of Ohio v. Fishel, involves another hot topic -- namely, whether non-competes with four employees survived a series of successive mergers. (See my post on the OfficeMax v. Levesque case out of the First Circuit, which grappled with a similar issue).

In Acordia of Ohio, the trial court refused to enforce the non-competes because they were confined to the specifically named former employers, which had changed over time after a series of successive mergers. After each merger, the company holding the specific non-compete disappeared. According to the trial court, this effectively terminated employment under each non-compete and triggered the time period of each non-compete. By the time the four employees decided to leave and join a competitor, each of their non-competes had expired under this analysis.

The First Appellate District in Hamilton County (the county where Cincinnati is located for you out-of-staters) affirmed the ruling late last year, looking not only at the language of the agreements in question but relying on Ohio statutory law to support its holding (citing in particular, Ohio R.C. 1701.82(A)(3)), which deals with the legal effects of a merger of Ohio corporations). The First District relied on older Ohio Supreme Court authority holding that "the absorbed company ceases to exist as a separate business entity" and that "[b]ecause the predecessor companies ceased to exist following the respective mergers, the Fisher team's employment ceased to exist following the respective mergers, the Fisher team's employment with those companies was necessarily terminated at the time of the applicable merger."

As I wrote last fall, this case pits the shortcomings of the covenant's language against the common sense notion that something worth protecting survived the merger. Judge Bettman has a post on the oral arguments on this case as well. Again, a decision should be forthcoming soon.

Other Noteworthy Decisions:

The Tenth District Court of Appeals (which covers Franklin County, the county that includes Columbus, Ohio) issued two trade secret decisions on December 30, 2011. I wrote about one, Columbus Bookkeeping & Business Services, Inc. v. Ohio State Bookkeeping, Case No. 11AP-227 (Dec. 30 2011), in which the Tenth District took the unusual step of reversing a preliminary injunction issued against several former employees who were alleged to have misappropriated a customer list. The Tenth District was unimpressed with the trade secret bona fides of that customer lists and seemed troubled about the absence of a non-compete.
 
The Tenth District also issued an opinion in Columbus Steel Castings Co. v. King Tool Co., 2013 Ohio 6826 (10th Appellate Dist. Court of Appeals, Dec. 30, 2011), affirming the trial court's entry of a permanent injunction imposing a royalty even though the jury had declined to award damages for the misappropriation of trade secrets by the defendant. For more on this case, see Seyfarth Shaw's Trading Secrets blog post discussing this opinion.
 
In February, U.S. District Court Judge Michael R. Barrett denied a motion for a TRO because the plaintiff had publicly posted its alleged trade secret information online. In Allure Jewelers, Inc. v. Ulu, No. 1:12cv91, 2012 WL 367719 (S.D. Ohio Feb. 3, 2012), Judge Barrett emphasized that Allure’s Complaint failed to show any reasonable efforts of secrecy regarding pricing information, which was made publicly available on Allure’s website. Seyfarth Shaw's Trading Secrets has a post on this case, also.
 
Finally, as I wrote last month, the Stark County Court of Common Pleas (Canton, Ohio) issued a ruling that may have significant repercussions within the radio and television industry and the manner in which they draft their non-competes in the future. In DeLuca v. DA Peterson, Judge Charles E. Brown, Jr. found that a radio station's covenant not to compete did not prevent two radio co-hosts from launching an online streaming music website. 

Judge Brown reasoned that the covenant only prohibited the former employees from running a business that was "the same or essentially the same as a commercial radio station." He concluded that that the new online venture fell outside the language of the non-compete because it did not use the public airwaves, required no FCC license, was not regulated by the FCC, and was not subject to the 60 mile transmission radius restricting radio stations. (A PDF copy of the opinion, which came out several days after his ruling from the bench, can be found here).

 

Thursday Wrap-Up (May 3, 2012): Noteworthy Trade Secrets, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 3. May 2012 10:30

Here are this week's notable posts, articles and links:

Trade Secrets and Covenant Not Compete Posts, Articles and Links: 

  • In a high profile case filed in California last week, American International Group and its subsidiary ILFC sued the co-founder and former chief executive of its aircraft-leasing business, Steven Udvar-Házy, and accused the industry veteran of stealing trade secrets and other confidential information for Air Lease Corp., a rival company he now runs.  The complaint alleges several employees, while still working at ILFC, downloaded confidential files and allegedly diverted deals with certain ILFC customers to Air Lease, before leaving to join Air Lease.  The case has generated a lot of headlines in the financial press and will be worth following. 
  • Law360 is reporting that two former Alliance-Bernstein executives have been held in contempt for using confidential information to lure their former clients to their new employer, Morgan Stanley. The two executivies, Peter A. Gelwarg and Kenneth A. Mayer, apparently violated a June 2011 TRO issued by New York Supreme Court Judge Eileen Bransten.
  • Does the practice of psychology fall within "the practice of medicine"? In Thomas Krajacich v. Great Falls Clinic, the Montana Supreme Court recently found that it did, at least based on its review of the four corners of the covenant not to compete. The court affirmed a lower court's ruling that three psychologists who had left a medical practice forfeited their partnership shares when they began competing with their former partners. (A PDF copy of the opinion can be found below).
  • How long can a non-compete last in Texas? According to Strasburg's Non-Compete Blog, in a recent case, Heritage Operating v. Rhine Bros., the Fort Worth Court of Appeals found that a 10 year covenant that accompanied the sale of a business was not per se unreasonable.
  • In the latest article extolling prior user rights under the America Invents Act (AIA), Fast Company's John Villasenor concludes that the AIA's new prior user rights have effectively given trade secrets a "promotion" over patents. In "5 Ways To Leverage Trade Secrets," John writes that trade secrets "retain the same advantages as before in terms of offering a competitive advantage, while one of their risks--the possibility of being held liable for practicing your own trade secret--has been lowered." 
  • Two weeks ago, I wrote about a non-compete dispute between an Ohio radio station and a pair of its former radio personalities over whether a streaming online show was covered by that non-compete. Stark County Court of Common Pleas Judge Charles E. Brown, Jr. has since issued his opinion finding that WDJQ's covenant not to compete did not apply to the online venture launched by Patrick DeLuca and Charlotte DiFranco. (A copy of the opinion can be found in the second PDF below).
  • Apple is notoriously good at keeping its trade secrets secure. Its latest idea? Building its own employee-only restaurant to keep prying ears from listening to shop-talk between Apple employees. 
  • In the latest legislative development involving non-competes, Tennessee's legislature recently eliminated the six-year limitation on non-compete agreements and extended the statute to include osteopathic physicians, reports Burr & Forman's new Non-Competes & Trade Secrets Blog. However, the statute will continue to prohibit non-compete agreements for physicians specializing in emergency medicine.

China and Trade Secrets:

  • "US Grapples With Growing Threat From Trade Secret Theft," reports The Wall Street Journal. The article details efforts by the Obama administration to work more closely with the private sector to address this threat which it details is primarily originating within China. The Journal says the catalyst for this planned public-private partnership was a recent study released by The Center for Responsible Enterprise and Trade, or Create, a nonprofit that promotes "better practices in the supply chains of multinationals on issues like corruption and intellectual property rights." According to the article, Pamela Passman, a former deputy general counsel at Microsoft who founded Create, said trade secret theft is becoming an "epidemic," but isn't discussed much because of the sensitivities involved.

Computer Fraud & Abuse Act Articles and Posts: 

  • The Computer Fraud and Abuse Act (CFAA) does not apply to throttling cases, according to the Eastern District of New York. The practice of “throttling,” or limiting heavy users’ access to Internet servers to free up bandwidth for others has spawned a number of lawsuits against ISPs who are struggling to manage their bandwith. Robert Milligan of Seyfarth's Trading Secrets Blog reports that in Serrano v. Cablevision Systems Corp., the Eastern District dismissed a class action under the CFAA, finding the claims were barred "by the clear language of the Terms of Service and the Acceptable Use Policy."

Cybersecurity Articles and Posts:

  • The U.S. House of Representatives passed the Cyber Intelligence Sharing and Protection Act (CISPA) last week, and it is shaping up to be a battle as it moves to the Senate. The Washington Post has a good summary of the legislation.
  • For a fairly balanced view of CISPA, check out Alex Howard's "Passage of CISPA in the U.S. House Highlights Need for Viable Cybersecurity Legislation" on O'Reilly's Radar.
  • "An Ex-FBI Cybersecurity Expert's Dire Warnings for Corporate America," reports Catherine Dunn of Corporate Counsel. Former FBI official Shawn Henry has become one of the stronger advocates for greater corporate emphasis on cybersecurity.

News You Can Use:

  • "Do iPhones Make Us Narccisists"? asks SmartMoney.  

Krajacich v. Great Falls.pdf (144.86 kb)

DeLuca v. DA Peterson.pdf (1.13 mb)

About John Marsh

John Marsh Hahn Law AttorneyI’m a Columbus, Ohio-based attorney with a national legal practice in trade secret, non-compete, and emergency litigation. Thanks for visiting my blog. I invite you to join in the conversations here by leaving a comment or sending me an email at jmarsh@hahnlaw.com.

Disclaimer

The information in this blog is designed to make you aware of issues you might not have previously considered, but it should not be construed as legal advice, nor solely relied upon in making legal decisions. Statements made on this blog are solely those of the author and do not necessarily reflect the views of Hahn Loeser & Parks LLP. This blog material may be considered attorney advertising under certain rules of professional attorney conduct. Regardless, the hiring of a lawyer is an important decision that should not be based solely upon advertisements.

BlogRoll

Download OPML file OPML